Fertilizer Policy in India: A Critical Analysis

“The secret of rapid agricultural progress in the under developed countries is to be found much more in agricultural extension, in fertilizers etc than in altering the size of the farm, in introducing machinery, or in getting rid of middle men in the marketing process”. – W. A. Lewis

In this write-up, we will glance through the Fertilizer Industry in India, the various Government policies and interventions related to it, the effects these have had on the Industry, problems still persisting, the areas which need improvements and many other things. We have also covered the neem coated urea UPSC.

Fertilizer: Fertilizer is defined as any organic or inorganic substance, natural or artificial in nature supplying one or more of the chemical elements/nutrients required for plant growth. They provide six macronutrients and eight micronutrients to the plants for well balanced growth. Nutrients:

Neem Coated Urea: Spraying urea with neem oil. It has a few benefits (Agronomic and Environmental benefits).

Neem has proven nitrification inhibition properties. This way it slows down the process of nitrogen release from urea (by about 10 to 15 per cent). Thus it reduces the consumption of the fertilizer

Enhance the yield

Decrease urea requirement. Hence, save Money

Indian Fertilizer Sector: A Glance: Indian soils are generally deficient in nitrogen, phosphorus and potassium and do not give high yields. Hence, the need for fertilizers. Green Revolution (Use of chemical fertilizers was one component) has made significant impact on Indian agriculture. Thus, India was able to achieve Self-sufficiency in food production.

Union List (Entry 52)& Concurrent List (Entry 33) – Fertilizer as an industry is under the control of the Union Government (being in the First Schedule of the IDR (Industries (Development and Regulation)) Act, 1951) vide Entry 52 of List I and also Entry 33 of List III. Urea dominates the sector. It is the most produced (86%), the most consumed (74%) and the most imported (52%).India’s produces about 80 percent of its Urea fertilizer needs. And the fertilizer industry has the capacity to indigenously meet 50 percent of the country’s phosphatic fertilizers. But India still depends heavily on imports for the raw ingredients for its phosphatic and potassium fertilizers.

Fertilizer Policy/Government Interventions:

Objectives: Major focus of the fertilizer policy has been on primary (macro) nutrients.

Since independence, Government of India (GoI) has been regulating sale, price and quality of fertilizers.GoI has declared fertilizers as an essential commodity. GoI issued the Fertilizer Control Order (FCO) under the Essential Commodities Act, 1957.No subsidy was paid on Fertilizers till 1977 except Potash for which subsidy was paid only for a year in 1977.

Retention pricing scheme (RPS): Introduced for nitrogenous fertilizers in 1977. Later, it was extended to phosphatic and potasssic fertilizers (Including Imported fertilizers). In this, the difference between retention price (cost of production as assessed by the government plus 12% post-tax return on net worth) and the statutorily notified sale price was paid as subsidy to each manufacturing unit. This was the beginning of “Product-based subsidy” regime.

Effect:

It resulted in extraordinary increase in domestic capacity/production and consumption of fertilizers. Increase in fertilizer use led to significant increase in productivity of cereals and thereby overall food grains production.

In the 90s, there was a huge subsidy burden on the government. This led to an increase in Fiscal Deficit.

In 1991, a Joint Parliamentary Committee (JPC) was appointed to review the Fertilizer Pricing. The Committee did not favour total decontrolling of fertilizers but recommended decontrol of import based phosphatic and Potassic fertilizers

Based on the recommendations, the GoI decontrolled all Phosphatic and Potassic (P&K) fertilizers namely DAP, MOP, NPK complex fertilizers and SSP (Single Super Phosphate)in 1992 which were under Retention Price Scheme (RPS) since 1977. But, Urea which continued to remain under RPS.

Effect:

Prices of phosphatic fertilizers became high. Hence, the production and consumption of nitrogenous fertilizers increased and consumption of P&K fertilizers decreased. This led to severe imbalance in consumption of nitrogenous, phosphatic and Potassic fertilizers.

Ad-hoc Concession Scheme: For phosphatic, potassic and NPK complex fertilizers. It was to provide P&K fertilizers to the farmers at affordable prices so as to increase the food productivity in the country through balanced use of fertilizers. Under this scheme, concession was disbursed to the manufacturers/importers by the State Governments based on the grants provided by Department of Agriculture & Cooperation (DAC).

During 1997- 98, Department of Agriculture & Cooperation (DAC) started indicating an all India uniform Maximum Retail Price (MRP) for DAP/NPK/MOP.The total delivered cost of fertilizers being invariably higher than the MRP indicated by the Government, the difference in the delivered price of fertilizers at the farm gate and the MRP was compensated by the Government as subsidy to the manufacturers/importers.

Till 2000, the issues relating to fertilizer subsidy was being looked after by DAC and thereafter it was continued by Department of Fertilizers.

In the year 2000, The Expenditure Reforms Commission (ERC) recommended for dismantling of existing RPS for urea. Hence, RPS for urea units was replaced byNew Pricing Scheme (NPS) in the year 2003.

New Pricing Scheme (NPS): Concession Scheme for urea units based on the prices of feedstock used and the vintage of plants. It had various phases like NPS-I (2003-2004), NPS-II (2004-2006) and NPS-III (2006 onwards). The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.Urea is the only controlled fertilizer, which is sold at statutory notified uniform sale price. The Phosphatic and Potassic fertilizes are decontrolled and are sold at indicative maximum retail prices (MRPs).

It resulted in the distortion of the market. The fertilizer companies started bleeding due to fixed Urea prices and rising cost of Inputs such as Natural Gas and Naptha as 80% of the production of urea in India is gas-based.

Imbalance in the use of fertilizers. Also, led to the misuse of it through illegal export, preparation of adulterated milk etc.

The subsidy outgo of Government increased exponentially by 500% during 2005-06 to 2009-10 under the Concession Scheme with about 94% of the increase caused by increase in international prices of fertilizers and fertilizer inputs, and only 6% attributable to increase in consumption.

The product based subsidy regime proved to be a losing proposition for all the stakeholders viz farmers, industry and the Government. Hence, keeping in view the agriculture productivity, balanced fertilization and growth of indigenous fertilizer industry, competiveness amongst the fertilizer companies and to overcome the deficiency of concession scheme, the Government introduced Nutrient Based Subsidy (NBS) Policy for P&K fertilizers (MOP, DAP etc) with effect from 2010

Nutrient Based Subsidy (NBS) Policy, 2010:

Government fixes subsidy on an annual basis based on weight of the different Macro/micro nutrient (N, P, K, S etc) contained in the fertilizer

Manufacturers/Marketers are allowed to fix the Maximum Retail Price (MRP) at reasonable level

Drawbacks:

Urea is not covered under the scheme

Delay in NBS subsidy payments. Hence, Fertilizer companies focus more on Urea than other fertilizers

Increase in prices of Phosphoric and Potassic fertilizers

Farmers overuse Urea. Hence, the ideal ratio of NPK is disrupted

Neem Coated Urea Policy, 2015:

Government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 per cent of their urea production (It can even go up to 100%).Earlier, there was a cap of 35% on this. The government has also allowed manufacturers to charge a small 5 per cent premium on Neem-coated urea

Aim:

Checking the excessive use of urea which is deteriorating the soil health and adversely impacting overall crop yield

Benefits:

Reduce the subsidy outgo

Prevent diversion of urea for industrial use

Limitations:

The subsidy savings arising out of this pales beside the enormity (financially and politically) of the fertilizer subsidy that is paid on the three major fertilizers, N, P and K

Gas Pooling Policy, 2015:

All urea units would get gas at a uniform price. It seeks to change the industry dynamics in Urea sector by levelling gas costs for all players

New Urea Policy, 2015:

To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)

Need for the Policy:

India is world’s third-largest consumer of fertilizers

India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes

Objectives:

Maximize indigenous Urea Production to reduce import dependency and reduce subsidy burden on the government

Make Urea production plant to adopt best technology available and become globally competitive

Rationalization of Subsidy burden

Timely supply of Urea to farmers at the same MRP

Salient Feature:

Government will cover the entire cost of natural gas, which is the main feedstock of urea.

Movement plan for P&K fertilizers has also been freed to reduce monopoly of few companies in a particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight subsidy has been decided to be given on a lump sum basis so that the companies economize on transport. This will help farmers and reduce pressure on the railway network

Proposed Outcome:

Will cut the yearly subsidy bill

Increase annual production by 2 million tonnes

Drawbacks:

Does not seek to reduce the subsidy on N, P, K fertilizers

Gas availability is a key concern

Issues that need Attention:

Fertilizer is second highest in terms of subsidy (0.73 lakh crore or 0.5 %of GDP) after food. This has led to a high Fiscal Deficit. Also, only 35% of total fertilizer subsides reaches small farmers. The rest leaks out to black market, large farmers and inefficient producers

Administered Price of Urea – ApproxRs 5000/Tonne

Average Production Cost of Urea – Approx 18000/Tonne This means Government subsidizes 70% of the cost. Note: Government subsidizes 30% of the cost on P (Phosphorous) and K (Potassium) fertilizers. Prices of P and K were partially decontrolled under nutrient based subsidy scheme in 2010.

Fertilizer Association of India (FAI) points out “Budget allocations get exhausted in first five months of the financial year due to gross under-budgeting for the fertilizer subsidy in the successive Union Budgets. The year ends with carry forward of huge amount of unpaid subsidy bills which has been of the order of Rs 30-40,000 crores for the past three years.”

There is wide price differential between urea and P and K fertilizer. For Example, Di-ammonium Phosphate (DAP) retails at about Rs 24,000 a tonne (Costly). This has discouraged the use of P and K fertilizer, resulting in a serious nutrient imbalance in the soil

According to FAI, the N:P:K ratio was 8.2:3.2:1 in 2011-2012 against an ideal 4:2:1

Nutrient Ratio in soil

Ideal

Real

Nitrogen (N)

4

8.2

Phosphorus (P)

2

3.2

Potassium (K)

1

1

Fertilizer prices follow the trend in international petroleum prices. The International market is volatile

Most of the Fertilizer manufacturing cooperatives are loss-making due to the high interest burden

On one hand, tax payers pay for subsidies (and MSP), yet consumers still suffer from food inflation due to low productio

There is a decline in investment in new urea plants, so that the government is forced to import to make up the shortfall, which is about a quarter of its total urea requirement

Farmers don’t move to fruits, vegetable, horticulture cropping because they require special non-Urea fertilizers, which are not easily available at cheap rates

Shortage of coal and natural gas (feedstock) has decreased Urea production. Government has to import from abroad. This has increased the government’s subsidy bill. Recently, 3 urea plants were granted the permission to run on Naptha because the government was not able to provide them a Gas pipeline

“If you have an elephant and you start decorating the tail, you are not going to change the appearance of the elephant”. The “elephant” in this case is the fertilizer subsidy the government is finding increasingly difficult to sustain. The root of the problem lies in the administered pricing policy and the government’s increasing inability to afford the subsidy. Political compulsions (Due to drought) also make this an inopportune time to raise prices.

Suggested Measures:

Rationalization of fertilizer subsidies:

Decanalising urea imports:

This would increase the number of importers and allow greater freedom in import decision. It would allow fertilizer supply to respond flexibly and quickly to changes in demand

Reduce the dependence on imports and increase domestic production

A policy framework that incentivizes domestic production of fertilizers

Change the pattern of fertilizer use. This can be done by revamping and re-energizing the extension services and also changing the NBS suitably to remove the price distortion caused by it

NBS should be extended to Urea also

Rationalization of fertilizer subsidies:

At Present, central and state governments offer a host of price subsidies, including on rice, wheat, pulses, sugar, kerosene, cooking gas, water, electricity and fertilizer.Price subsidies have formed an important part of anti-poverty policies in India, but have not transformed the lives of the poor.

The Economic Survey stressed on cutting back of price subsidies by using technology as a means to plug leakages

Aim:

To cut leakages in the subsidies and not cut the subsidies itself

Converting all subsidies into direct benefit transfers

Pitch for Rationalization:

Expenditure Reforms Commission (ERC) examined this issue in 2000 and made a strong statement for rationalization

Has Rationalization of subsidy been successful before?

Direct Benefits Transfer (DBT)has been successful in the case of LPG

How can it be done?

Correcting Price Signals and Decontrolling the Fertilizer

Sector: Among the large developing economics, perhaps Indian farmers pay the lowest price for urea. This leads to the misuse of urea (Its diversion to non-agricultural uses as well as its being smuggled into neighbouring countries).

Direct cash transfer to the farmers: Instead of subsidizing fertilizer (especially urea) plants and keeping the price of urea abnormally lower than market dictated prices, the government can simply transfer cash to farmers equivalent to the current fertilizer subsidy. It can be done through the JAM platform. It will help the state to offer subsidy support to poor households in a targeted and less distortive way. It can use using mobile money and post offices to transfer subsidies. This will lead to huge savingsby simply stopping the diversion of urea for non-agricultural uses and to other countries

Tie-up with Gulf Countries to Set up Plants: Pooled gas price for urea plants in India is more than three times higher than in Gulf countries. So the best way is setting up joint ventures in countries where gas price is relatively low. For Example, the Fertilizer Ministry’s joint venture in Oman, which allowed India to import fertilizer at pricesalmost 50 per cent cheaper

Increase in soil testing facility and issuing soil health cards:

Digitisation of land records: Without setting right the land records, it will be impossible to transfer the subsidy to beneficiaries or to issue soil health cards.

Positives:

It will ensure financial benefits for all the stakeholders involved like the government of India, farmers, fertilizer manufacturers and the public at large

a. Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

General Studies 3:

Agriculture & related issues; Subsidies

Practice Questions:For Prelims

Iron (Fe) is one of the Macro nutrient required by the plants

Till 2010, India had a Product based subsidy regime

Which of the following is/are correct? a). 1 only b) 2 only c). Both 1 & 2 d). Neither 1 nor 2 For Mains 1). Is India’s fertilizer policy flawed? Critically Evaluate. 2). What do you mean by rationalization of subsidies. How do you think it can be achieved in the fertilizer sector? Important Links: India’s flawed fertilizer policy Urea Policy to Prune Subsidy by Rs 4,829 cr Govt. notifies new Urea Investment Policy Rationalizing Fertilizer Subsidy in India: Key Issues and policy options